Nominee Shareholder

Nominee Shareholder Meaning

Nominee shareholder refers to the holder of shares on behalf of another person or beneficial owner or original holder of shares. The nomination is a mandate given by a shareholder to give the legal title of shares to a described person with whom shares shall vest on the death of a shareholder or original holder of shares. A nominee is person who is described in that mandate.

Explanation

A nomination is a direction for shares disposals to a prescribed person in the event of the death of the original shareholder. The company allows the transfer of shares easily unless any special condition is kept under the legal, constitutional document of the company—I.e., articles of associationArticles Of AssociationArticles of association is a legally binding document that states the corporate rules, regulations, and purpose. It serves as a user's guide for executing the organizational tasks, directors' appointment and recording the financial information.read more in relation to Indian companies. If shares are held in joint capacity, both the holder of shares has to give nomination under their name of holding.

Nomination can be filed anytime during the lifetime in writing with the company in the prescribed form. It can be even canceled or amended later by filing a prescribed form. The effect of any mandate given by the shareholder shall be valid from the date when the company receives it. Nominee shareholder does not have any benefit as the beneficial shareholder is having till original beneficial shareholder is alive. Nominee enjoys the same rights and liabilities as of the original shareholderShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more once shares.

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Source: Nominee Shareholder (wallstreetmojo.com)

Functioning

  • As per UK law, any company or individual can become a nominee shareholder who acts as trustee to the shares in order not to disclose the identity of the actual shareholder.
  • Registration of nominee shareholders on behalf of the original shareholder is done by the holder of share to register them under whose hands securities shall vest upon the death of the original shareholder. Shares include securities in its definition.
  • They do not own any benefit or legal claim over shares until beneficial or original shareholder is alive. Every company maintains a list of the shareholder who is beneficial owners of the company’s shares. This list also includes details of the nominee.
  • Details of the nominee have to be updated by company time to time-based on details provided by beneficial owners. Such details are authenticated by the company secretary or such other person as nominated by the company’s board. In case of the death of beneficial shareholders, such a person ensures the filing and validity of the nomination.
  • On the death of the original beneficial shareholder, the nominee can either held a share in his name or transfer share in any person’s name as an original shareholder could have done. If nominee shareholder intends to transfer a share in his name, he or she must produce proof of death of original beneficial shareholder along with prescribed forms and documents this will not attract stamp duty as it is the case of transmission.

Agreement for Nominee Shareholder

A nominee is required to file a declaration of trust that they have no benefit over shares until the original shareholder is alive. This declaration is called a custodial agreement. Under the custodial agreement, the nominee shareholder holds the shares. Any person or body corporate can hold legal title to shares under nomination. Even a minor can be a nominee to shares in a company. If the nominee is minor, then shareholders shall appoint any other person to become entitled to shares in case of the death of shareholders during the minority of the nominee.

On the death of a shareholder, shares are transferred to nominee shareholders. He will have all rights as of original shareholders. They are a trustee for the legal heirs of a deceased shareholder. They cannot have ownership of shares until it is written into the will of deceased shareholders. Nomination to shares alone cannot consider nominee as the owner of the share until prescribed in the will of a shareholder. A nomination is just to have hustle free transmission if shares post the death of a shareholder.

Tax Implication

Benefits that accrue to the nominee on the death of beneficial owners will be taxable in the hands of the nominee as beneficial interest, which is attached to the shares on which nomination is registered. A nominee is liable for complying with payment of tax and for other liabilities, which he gets as attached to the shares. Hence nominee is liable for payment of tax for the benefit he received or for transferring the benefit to others on shares he received on the death of an original beneficial holder of shares.

Advantages

The nomination is a useful procedure that enables the company to identify a legal representative of the original shareholder in case of the deceased shareholder, which also avoids disputes of legal heirs to claim legal title to share in the case of the deceased shareholder. It involves a quick and easy process for a company to identify with whom to contact and deal with post demise of a shareholder.

Disadvantages

A disadvantage of nominee shareholders is that it involves time and cost to register and maintain details. For the company and the government many times, it is difficult to identify the beneficial owner of the shares to a held personally liable for benefits attached to the shares.

Nominee shareholder can take legal ownership of shares merely by his name given under nomination by the deceased shareholder in scenario of the negligence of a person entitled to shares under the will of a deceased shareholder.

Conclusion

There has been controversy in legal heirs vis ownership of rights of the nominee for transferred shares. At present, companies act does not allow to create third succession mode, i.e., a valid testamentary cannot override a valid nomination created under the Act. For the legal heirs, the nominee is held to be just a trustee. A fiduciary relationship is established between the nominee and legal heirs to protect the interest of legal heirs until the will of the original shareholder is given effect. Hence it can be said that alone nomination cannot establish ownership of shares; it is just a device for companies to enable smooth transmission of shares.

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